Royalty payouts by Maruti Suzuki to its parent Suzuki Motor Corporation surged 40% to near historic highs in FY23 on the back of best-ever sales reported by the carmaker. The manufacturer of models such as the Baleno and Wagon R is believed to have paid around Rs 4,200 crore in royalties last year.
As per Maruti Suzuki officials, the royalty rate for FY23 stood at 3.75% on revenues of `112,501 crore. The company reported an Ebitda (earnings before interest tax depreciation and amortisation) of Rs 11,007 crore, a jump of 96%. Maruti paid the highest royalty of nearly Rs 4,500 crore in FY19.
The increase comes little over two years after the Centre urged carmakers to find ways to bring down such payments to their foreign parent entities.
While addressing the annual convention of the Society of Indian Automobile Manufacturers (SIAM) in 2020, commerce and industry minister Piyush Goyal had asked auto companies in India to look for ways to avoid paying ‘millions of dollars as royalty’ to their parent companies. While Maruti’s payouts were on a decline since the minister’s speech, it shot up 40% in the last financial year.
Rahul Bharti, executive director (corporate planning and government affairs), Maruti Suzuki India, said that at one point in time, the royalty used to be above 6-6.5% before coming down to 5%. “The guidance we have given is that it will hover between 3.5-4%,” Bharti said.
All new models launched by Maruti pay royalty starting at 5% with the rate starting to taper off after the model achieves an unspecified threshold in volume terms. The royalty for the upcoming SUV Jimny, for instance, will also start at 5%.
“This formula (regarding royalty payment) is fixed and we don’t change it. Royalty varies from model to model and it depends on the product mix. But broadly speaking, it will remain in the range of 3.5-4%,” Bharti added.
Maruti was previously exposed to currency fluctuations risks when it made the payments in Japanese yen. To counter that, it was agreed that all royalty payments would switch to the Indian rupee. The switch, which was done in a progressive manner, was completed in FY22.
Earlier this year, Swadeshi Jagran Manch (SJM), an affiliate of the Rashtriya Swayamsevak Sangh, asked the Centre to impose a cap on the royalty payments and technical fees remitted by multinational corporations to their parent entities.
SJM’s demand came after Hindustan Unilever, India’s largest fast-moving consumer goods company, decided to increase royalty payments to its parent company Unilever to 3.45% from 2.65% over three years till 2025.
According to Naveen Aggarwal, partner, tax, KPMG India, the licence fees paid by Indian entities increased exponentially to $4.63 billion in 2021, 72% more than the fee paid in 2015.
“While royalty is a common practice for licensing IP (intellectual property), the tax authorities and minority shareholders perceive it as a profit extraction tool employed by foreign shareholders, leading to a near-term decrease in trust and confidence in such companies,” Aggarwal aobserved in a recent write-up.